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Office Depot Inc (ODP), Barnes & Noble, Inc. (BKS), OfficeMax Inc (OMX): A Few Interesting Developments in Specialty Retail

Like most other companies, specialty retailers were not spared during the recession. However, many of these companies are now staging a strong comeback. Office Depot Inc (NYSE:ODP)Barnes & Noble, Inc. (NYSE:BKS), and OfficeMax Inc (NYSE:OMX) are among the companies which look good for a variety of reasons.

Office Depot Inc (NYSE:ODP) is an international player in the office supply space. Until last year, speculations were rife that the company was going out of business as it was closing many store locations at a frantic pace. However, this painful restructuring has led to the company’s revival to better compete against Staples, Inc. (NASDAQ:SPLS), the largest office supply chain, which controls about 39% of the U.S. market. Over the last 12 months, the stock has almost doubled as it became clear Office Depot Inc (NYSE:ODP) was making inroads into competitors’ territory.

Office Depot Inc (NYSE:ODP)

Office Depot aims to acquire its rival

During the last couple of quarters, the company has reported narrower losses even though top line growth has remained under pressure. In 2012, the company booked a loss of $77.1 million on revenue of $10.7 billion, but the December quarter indicated a strong comeback. Despite the stock popping strongly, it clearly remains one of the most attractive stocks in the space.

Its current market price puts a premium of just 23% to the book value per share of $3.60. At the same time, Office Depot Inc (NYSE:ODP) has a debt equity ratio of just 0.64. However, this is set to increase as the company aims to acquire its rival OfficeMax Inc (NYSE:OMX) by the end of the year.

OfficeMax Inc (NYSE:OMX) operates in the same business and is not very small in terms of market capitalization than Office Depot Inc (NYSE:ODP). Since it has become a takeover target, its valuation has seen a tremendous growth of over 150% during the last 12 months. The proposed merger of the equals appears to be a good development for both companies as the move will likely result in hundreds of store closures where both companies have overlapping outlets. Faced with a common problem of declining sales, this is probably the best solution that promises to control costs and boost margins.

OfficeMax Inc (NYSE:OMX) registered a 2.8% decline in revenue last year to $6.92 billion. Pressure was visible on margins too, although net income surged to $416.8 million from $34 million last year due to gains on extinguishment of debt. Going forward, profitability is unlikely to see a boost on standalone basis as its price earnings ratio, currently at 2.4, is expected to increase to 17.7 on a forward basis. The stock currently trades at a price by book value ratio of 1.02 and has a slightly higher debt equity ratio of 0.89.

Nook leads hopes at Barnes & Noble

Barnes & Noble, Inc. (NYSE:BKS), another specialty retailer, has seen a revival in its fortunes. The stock has gone up 44% so far in the year, although its financial performance has not improved, and in fact, has deteriorated in recent quarters. For the nine months ended January 2013, Barnes & Noble, Inc. (NYSE:BKS) posted a 3.3% drop in revenue to $5.56 billion, but losses grew four-fold to $47.6 million. The company’s hopes are pinned on the Nook e-book reader which seemed to be a worthy product in its early days.

However, Barnes & Noble, Inc. (NYSE:BKS)’s digital sales accounted for only 15% of total sales in the most recent quarter, a full 5% below the 20% seen in the same period last year. For the first nine months of the current financial year, Nook sales have merely followed the declining trend of other segments and fell 13.2% to $668.3 million.

Foolish bottom line

Overall, the surge in Barnes & Noble, Inc. (NYSE:BKS)’s stock price does not appear to be supported by fundamentals and as such, it may be a better idea to wait. Meanwhile, Office Depot and OfficeMax Inc (NYSE:OMX) look like attractive options at current levels.

Jacob Wolinsky has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article A Few Interesting Developments in Specialty Retail originally appeared on and is written by Jacob Wolinsky.

Jacob is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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